What is the Difference Between Value, Growth, Large, and Small-Cap Stocks?

Common stock (frequently referred to as equity) represents ownership in a public corporation. Stock owners participate in the profitability of a company by receiving dividends, which is the distribution of a company’s profits (usually quarterly). As a company grows, its dividends commonly increase, motivating investors to pay more for the stock. This appreciation of a stock’s value is another way investors profit from stock ownership. Historically, dividends have accounted for approximately 40% of a stocks return, and the other 60% has come from appreciation.

Common stock owners have the ability to vote in elections for a company’s board of directors. If the company goes bankrupt, common shareholders only receive what remains after bond holders and preferred stock holders have been paid. This makes equities more risky to own than bonds, but stocks frequently rewards investors with higher returns over the long run.

Value stocks generally have low price-to-earnings ratios, and are considered to be undervalued in relation to other equity investment options. Traditionally, value stocks pay out the most of their earnings in dividends. Investors buy value stocks at low prices and hope their prices increase.

Growth stocks have a high price-to-earnings ratio, and usually pay either a small or no dividend because earnings are constantly reinvested into the company. This allows the company to grow at a faster rate. Investors buy growth stocks at high prices and hope their prices go even higher.

Of course, companies come in various sizes, as measured by market capitalization (number of common shares multiplied by the price of the stock). Generally, a small company is a firm with a market cap of less than $2 billion. A mid-sized company is a corporation with a market cap between $2 billion and $10 billion. Lastly, a large company has a market capitalization above $10 billion. Smaller companies are usually considered to be a more risky investment, and thus, traditionally have provided a higher return than large cap stocks.

About the author

Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

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